Set to Profit From This Unstoppable Communications Trend
The 5G revolution is just getting started...
Samsung, Google-parent Alphabet (GOOGL), and Apple (AAPL) all have either released 5G phones or are set to release 5G phones in the coming months. Semiconductor giant Qualcomm (QCOM) said it expects between 450 million and 550 million 5G phone shipments in 2021, double the projected amount in 2020.
According to European digital mobile network the Global System for Mobile Communications ("GSM"), less than 1% of mobile phone users utilized a 5G connection in 2019. That's expected to grow to 46% of users by 2025.
But it's not just the phone makers that benefit from the shift to 5G. Mobile providers have to make sure that they have 5G coverage available for users. One of the only ways to do this will be to build new infrastructure and cell towers.
That's where today's company comes in...
American Tower (NYSE: AMT) is the largest publicly traded communications tower company in the world.
As a real estate investment trust ("REIT"), American Tower owns and operates structural towers and the real estate they're built on. Specifically, the company builds and maintains the towers, then it rents space on the tower and leases land parcels below the tower to major service providers.
Service providers source their own equipment that they place on the tower. They also build their own ground-station shelters and source their own base-station equipment below the tower.
It's a simple but booming business...
In total, American Tower has more than 180,000 communications sites worldwide. Its largest markets are the U.S., where it operates 41,000 sites, and India, where it runs 75,000 sites. It also has 19,000 locations in Brazil and almost 5,000 in France and Germany.
But moving forward, American Tower's main driver for growth will likely be 5G infrastructure in the U.S. and Europe.
American Tower does business with the largest communications service providers on the planet. This includes the "Big Three" U.S. service providers AT&T, Verizon, and T-Mobile.
These customers are among the most stable that exist. And more than that, telecom services have become so ubiquitous and essential to daily life in America that there is little to no risk of American Tower's customers not being able to pay their rent – even in a recession.
Not only are American Tower's customers financially stable, but once a tenant leases space on a tower, they tend to stick around for the long term. Once a tower is built into a telecom's service, the tenant risks harming their network quality if they shrink their footprint. For cellphone carriers, maintaining network quality is critical to low tenant losses.
Most of its communication towers house equipment from multiple tenants. Rental charges are based on the tower location. (For instance, urban areas are more lucrative than rural areas based on increased demand and the cost of property.)
The company also bills its customers based on the leased vertical square footage and weight placed on the tower. During the previous transition from 3G to 4G, the general trend has been a steady increase in both measures.
That means increased revenues from existing customers and increased revenue from new sites. And it's moving to expand its asset portfolio...
Last week, American Tower announced that it had agreed to acquire InSite Wireless in a deal worth $3.5 billion. The acquisition would see American Tower take over InSite's 3,000 communication sites in the U.S. and Canada.
American Tower said that it expects InSite's assets to add $150 million in property revenue and $115 million in gross margin in its first year as part of the company. American Tower also said that it expects the deal to add to the company's adjusted funds from operation ("FFO") before the end of the year.
And as a REIT, American Tower has to pay a hefty dividend. You see, REITs must pay out at least 90% of their taxable income in dividends.
Since its first year as a REIT in 2012, American Tower has grown its annual dividend by more than four times, from $0.90 per share to $3.61 in 2019. Its annual dividend payout is expected to grow again in 2020 to $4.33.
These dividends are a crucial piece of the American Tower investment story. Most REIT investors are primarily looking for the income that REITs provide, so its ability to consistently grow its dividend every year has and will continue to attract yield-seeking investors.
American Tower is a great way to play the 5G tailwind for the telecommunications sector. It's the largest in the market with a huge footprint and deep pockets. So as mobile carriers look to build out their 5G networks, they're likely going to turn to American Tower.
Sometimes investing is simple.